India needs to get ready for the inevitable volatility that will arise within the foreign exchange market as the country advances further towards the internationalisation of the Rupee.

This is according to the deputy governor at the Reserve Bank of India (RBI).

An international currency is freely available to non-residents, Reuters reports, predominantly for cross-border transactions. In terms of the Rupee, this will be accomplished by promoting it for import and export without limits.

However, this will make the Rupee more responsive to global events, thereby increasing outflows and volatility.

"It is now widely accepted that while internationalisation and a freer capital account comes with its own set of benefits, it is not without risks," said central bank deputy governor, M. Rajeshwar Rao.

"Freer capital flows come with their own set of challenges, the primary one being that of volatility, and we need to gear up to manage that."

Rao made the comments during his keynote address at a conference organised by the Foreign Exchange Dealers' Association of India (FEDAI) earlier in the week. A copy of the speech was posted on the central bank's website on Thursday.

India has continued to promote trade denominated in Rupees. In July last year, the Reserve Bank of India unveiled a new way to settle international trade in Rupees, with the aim of promoting exports and facilitating imports.

Rao added there was a "good amount of interest" in the Rupee trading arrangements the central bank was implementing. And should the efforts be a success, local exporters and importers will not need to hedge, he stated.

Although he cautioned that greater connection between markets would pose more challenges, there would also be opportunities.

New frontiers will come about as banks in the country increase their presence in offshore markets, non-residents are involved more in domestic markets, and tech changes continue to alter the way markets work, he continued.

The RBI deputy governor said the bank is committed to progressively advancing, in line with the shifting macro-financial environment both domestically and globally.